Overpriced Malbec Is a Turnoff as Locals Flee: Argentina Credit

By Camila Russo -
Aug 15, 2013

Argentines are undermining President
Cristina Fernandez de Kirchner’s attempt to halt the biggest
drop in currency reserves in a decade as their spending abroad
widens the deficit from tourism to a record.

Locals traveling overseas spent an unprecedented $303
million more than what foreigners bought in the country during
the first half, four times the gap in the same period last year,
according to the National Statistics Institute. That’s
exacerbated the decline in foreign reserves, which plunged $6.3
billion this year to a six-year low of $37 billion.

Fernandez banned dollar purchases for savings last year in
a bid to slow capital flight and to save foreign currency used
to pay debt that yields more than twice the emerging-market
average of 5.95 percent. Faced with costs in pesos that are
rising at an estimated 25 percent a year, Argentines are using
credit cards to buy everything from clothes to electronics
abroad and to obtain cash at better rates than they would get in
black markets on the streets of Buenos Aires.

“It’s one of the few ways Argentines have to legally
access dollars,” Juan Pablo Fuentes, an economist at Moody’s
Analytics Inc., said in a telephone interview from West Chester,
Pennsylvania. “It adds to a bigger problem of capital flight
and a deteriorating current account.”

Widening Deficit

Tourists in Argentina spent $1.3 billion in the first half,
the least since 2006, as inflation and an overvalued currency
make the country’s iconic attractions and products from visiting
glaciers to drinking Malbec wine and purchasing leather goods
more expensive, said Fuentes at Moody’s.

A bottle of Luigi Bosca 2007 malbec in Argentina costs 180
pesos ($32), double its price of $13 in the U.S., according to
retailers wine.com and Winery.

The tourism gap in the first six months of the year exceeds
last year’s record $89 million annual deficit, the first time
Argentines spent more abroad than foreigners did in the South
American nation since 2001.

Spending abroad by Argentines in the first half fell to
$1.6 billion from $1.7 billion in the same period last year
after Fernandez increased the tax on purchases with bank cards
abroad to 20 percent from 15 percent in March. That now implies
a dollar rate for bank card purchases of about 6.68 per dollar
compared with the official rate of 5.57.

Last month, Fernandez said the number of Argentines
traveling abroad in the past 10 years has jumped 135 percent.

“This means that they have dollars,” she said in a speech
in Chaco province, adding that it showed the “hypocrisy” of
those who say there are currency controls.

Dwindling Reserves

Fernandez restricted foreign currency purchases in the week
after her re-election in October 2011, requiring authorization
from the tax agency to buy dollars, and in July 2012 she banned
most purchases.

The measures have proved insufficient to stop the decline
in central bank funds, which has prompted Citigroup Inc. to say
there’s a 37.5 percent chance dollar bonds due 2015 will be
restructured on a weakening capacity of payment.

“Every measure reinforces the idea that the official
dollar is cheap so people will keep doing whatever they can to
get it,” Jose Luis Espert, who runs Buenos Aires-based research
firm Espert & Asociados, said in a telephone interview. “It
doesn’t stop capital flight. It has the opposite effect and
makes it worse.”

The extra yield investors demand to hold Argentine debt
instead of U.S. Treasuries was little changed at 1,017 basis
points at 12 p.m. in New York, according to JPMorgan.

Soy Harvest

Argentina’s five-year credit-default swaps, contracts that
protect holders of the nation’s debt against non-payment, fell
seven basis points to 2,232 basis points at 11 a.m. in New York,
according to data compiled by CMA Ltd.

The drop in reserves will be mitigated by the country’s
soybean harvest, said Neil Shearing, chief emerging-markets
economist at Capital Economics Ltd. in London.

“At the moment it’s being crossed over by the fact that
soy prices are high and the soy harvest has been strong,”
Shearing said in a telephone interview from London. “That’s
helping to taper over the crisis of the balance of payment this
year.”

While more savvy tourists are starting to bring cash to
exchange for pesos in the black market, most are probably using
credit cards and exchanging at the official rate, he said.

‘Very Sensitive’

The inflation-adjusted exchange rate, or the real effective
exchange rate, of the peso has appreciated 16.5 percent in five
years, making it the most overvalued of 15 emerging-market
currencies tracked by Credit Suisse Group AG, according to an
Aug. 8 report.

The tourism gap will continue widening because completely
shutting dollar access for travel would be unpopular and further
deteriorate government support, Fuentes said.

“The middle class is very sensitive to this issue so any
additional controls are inviable,” he said. “While the gap
with the parallel peso keeps widening, the incentive to travel
is even greater.”